RTRS: EURO GOVT-Bund yields rise as focus shifts back to euro zone
* Bund yields rise as rally looses steam
* Non-German yields edge up as politicians disagree
By Kirsten Donovan
LONDON, Dec 10 (Reuters) - German government bond prices fell on Friday, failing to build on the previous session's rally as politicians disagreed over measures to resolve the euro zone's sovereign debt crisis.
Higher equities also lessened the appeal of Bunds, which had attempted to extend gains in early trade after U.S. Treasuries, the main driver for the market this week, rebounded after a strong auction of 30-year debt.
"The year-end environment is not providing material support for Bunds which suggests systemic and fundamental risks are still driving forces," said Lena Komileva, head of G7 economics at Tullett Prebon, adding a rise in riskier assets was undermining support for safe-haven bonds.
Analysts said that although economic fundamentals pointed to higher euro zone and U.S. yields, this week's sell-off, which pushed 10-year Bund yields above 3 percent, had been overdone.
"There could be more selling going into the quieter year-end period but we think 10-year Bund yields should continue to find support at the 3 percent mark, while next week's European Council meeting poses an event risk," said Norbert Aul, rate strategist at RBC Capital Markets.
March Bund futures FGBLc1 were flat at 124.95, having earlier risen as far as 125.33. The contract marked record highs in September of 134.77 but has sold off sharply since, partly on concerns over how much it would cost Germany if more euro zone countries needed financial assistance. This week's slide in Treasuries added momentum.
"The growing positive correlation between core and peripheral bonds maintains concerns about the possibility of a negative feedback loop if German collateral is extended to contain the spreading sovereign debt crisis in 2011," Tullet's Komileva said.
German two DE2YT=RR and 10-year DE10YT=RR yields were 2bps higher at 1.041 percent and 2.958 percent respectively.
The area around 3.08 percent -- Wednesday's high -- is seen as strong resistance for 10-year yields -- representing the 38 percent retracement of the fall in yields since the start of the financial crisis in late 2008.
The spread between two- and 10-year bonds has narrowed more than 20 basis points since Wednesday to around 190 basis points, led by an underperformance of two-year bonds since a weak sale of German two-year paper on Wednesday. The yield on that debt is 10 bps higher than the average yield at the auction DE113732=.
